Stock market may undergo correction in short term

Stock market may undergo correction in short term 25 Aug, 2008, 0418 hrs IST,

doweshowbellyad = 0; D Kannan Executive Director, Kotak Securities Calendar year ’08 has seen a very volatile domestic capital market. From the highs of about 21,000 in January ’08, the BSE Sensex came down to a low of about 12,500 in July ’08, before recovering to its current levels. In the process, it wiped out all the gains accumulated since April ’07. Before forming a medium-to-long term strategy for the stock market, one should look at the reasons for this volatility. In late ’07 and January ’08, the market marched higher on the back of high gross domestic product (GDP) growth, and good corporate performance . Significant foreign institutional investors (FII) inflows in late CY07 (September-December ’07) helped the market ride higher. This euphoria led to the Indian market outperforming its Asian peers by about 15% in December ’07-January ’08. However, during this period of euphoria , the stock market ignored the factors which were impacting global bourses negatively. These included rising crude prices, the subprime crisis in the US and depreciation of the dollar vis-à-vis major currencies, including the Japanese yen. On the valuations front too, at 21,000 levels, the market was already discounting next year’s (FY09) earnings by about 21x, which was at the higher end of the valuation band. These global concerns led to an eventual withdrawal of liquidity from the Indian market, resulting in a steep fall. Subsequently, domestic factors like rising inflation, increasing interest rates, rising fiscal deficit (due to ever-increasing crude/commodity prices and subsidies) and prospects of an economic slowdown took over. This led to the under-performance of the domestic market in the second quarter of ’08, vis-à-vis other emerging markets. If we look at the current scenario, inflation has touched 12.63% (due to high crude and commodity prices) and is expected to remain at higher levels in the coming months, according to the Reserve Bank of India (RBI). The monetary and fiscal measures taken by the RBI and government are impacting growth. The high commodity/crude prices and interest rates are affecting corporate profitability. While this is negative from the stock market perspective, we think that the same is now already getting factored in. In fact, the consensus GDP growth for FY09 is already lower than RBI’s estimate of about 8%. The market also recognises the fact that inflation may inch up further in the near term before cooling down and interest rates may move up marginally over the current levels. However, a further deterioration in the US economy and a surge in crude prices remain the key risks. Crude and commodity prices have fallen appreciably from their highs, of late. But with the global economy slowing down, demand is expected to moderate. Some members of the Organisation of Petroleum Exporting Countries (Opec) have also increased the supply of crude. This is expected to provide relief to global equity markets . The monsoon in India has also revived in recent weeks, providing a much-needed relief on the inflation front. Recent developments on the political front suggest that stalled reforms may see the light of the day in the near term. We expect the market to move up once it gets more confident about FY10 earnings. This is expected to make the market more attractive from a medium-term perspective. This should lead to improved FII liquidity especially, as India, despite the slowdown, is expected to be the second-fastest growing economy in the world. Post the recent under-performance , we believe that the valuation premium of the Indian market has also reduced significantly. Though negative global and domestic factors have impacted the economy, corporate performance and the market in CY08, things appear to have taken a positive turn in the recent past. With FY09 valuations looking fair, we expect the market to undergo a correction in the short term before seeking a trend. The triggers which are expected to provide the medium-term direction are FY10 earnings, inflation, crude prices and the US economic scenario.

FDI inflow to remain flat this fiscal: Citi

FDI inflow to remain flat this fiscal: Citi 25 Aug, 2008, 1934 hrs IST, PTI

NEW DELHI: Contrary to the optimistic outlook on foreign direct investment (FDI) by the Prime Minister’s Economic Advisory Council, leading financial services provider Citi on Monday said the fund inflow is expected to remain flat during the fiscal. “Despite strong trends, we expect FDI to stay flat in FY’09 at USD 32.2 billion posted last year,” Citigroup Global Markets said in its latest report. Interestingly, the government expects about 25 per cent surge in FDI at USD 40 billion. The country received USD 20 billion FDI between January and June in the calendar 2008 and USD 10 billion in the first quarter of the current fiscal, against USD 5 billion seen during the same period last year. “Going by this, achieving USD 40 billion in 2008-09 does not seem unrealistic,” Secretary in the Department of Industrial Policy and Promotion Ajay Shankar said at a FICCI function today. Even, the recently published economic review of PMs Economic Advisory Council had said that the rapid increase in FDI could be due to a “bunching of transactions and is unlikely to be sustained throughout the year”. The report said that taking into account an increase in outward FDI, the net FDI is expected to be at USD 15 billion in 2008-09 against USD 15.5 billion seen last year. Citigroup further highlighted the fact that the increase in FDI during the first quarter was partly due to higher private equity (PE) inflows, which are classified as FDI under “acquisition of shares” by the RBI. PE flows comprised as much as USD 2.2 billion of total FDI during the quarter against USD 1.2 billion last year. On a sectoral basis, FDI inflows are largely being channelled into construction and real estate which aggregated to about 40 per cent, while financial and non-financial services sector attracted about 22 per cent in the first two month of the fiscal. Saying that FDI data during FY09 will remain crucial, Citigroup expects, “FDI to play an important role in financing the current account deficit”. There was a lull in Foreign Institutional Investors (FIIs) movement because of grim global environment and weak external commercial borrowings due to stringent norms. Accordingly, “the onus would be on FDI to sustain overall capital flows and finance the rising current account,” the report said. The report further noted that foreign institutional investors and domestic mutual funds have remained subdued. “Overall FII outflows for the fiscal now total 3.93 billion dollar, compared to inflows of 6.6 billion dollar over the same period last year,” Citigroup said, adding that DMFs have net buyers at 754 million dollar this fiscal, albeit lower than the 1.01 billion dollar last year. Regarding high inflation rates, Citigroup said, “with headline inflation likely to inch up further, we expect monetary policy to remain tight and 10 year yields to inch up towards 9.5 per cent level.” While on Rupee volatility it said, “Near term movements are likely to remain choppy and dependent on dollar inflows, oil as well as direct or indirect intervention by the RBI”.